Investment Highlights

• We maintain our OVERWEIGHT recommendation and 2022 total industry volume (TIV) forecast of 555k units, implying a 9% YoY growth. March’s industry volume hitting an all-time record high at 73,222 units is a firm signal of strong demand recovery following the reopening of the economy. We remain positive on the sector’s prospects given that earnings would be relatively shielded from the impact of geopolitical conflicts since most companies within the sector rely on domestic demand. Our assumption of a stronger 2022 TIV is based on the normalisation of supply chains and a gradual recovery of consumer confidence.

• The Malaysian Automotive Association’s (MAA) TIV hit an all-time high of 73,222 units (+63% MoM, +13% YoY) in March. The improvement was mainly driven by the pick-up in production by automakers which was supported by robust backlogged orders. Almost all key marques recorded stronger YoY and MoM sales. Cumulatively, 3M2022 TIV expanded 13% YoY to 159,752 units. Sales of commercial vehicles grew 49% MoM and 15% YoY to 7,320 in March, bringing YTD 3M2022 sales to 19,162 units (+33% YoY).

• Strongest sales growth from Mazda. Among the key brands, Mazda’s sales volume improved the most at >100% MoM and 82% YoY to 2,220 units, offsetting the lower sales in January and February. This brought the brand’s average monthly sales to a normalised level of 1,180 units for YTD 3M2022. All other key brands such as Perodua (+54% MoM, +10% YoY), Toyota/Lexus (+32% MoM, +3% YoY), Nissan/Renault (+>100% MoM, +34% YoY), and Honda (+75% MoM, +18% YoY) also reported improvement in sales volume YoY except for Proton (+35% MoM, -17% YoY).

• Car prices are increasing. To combat rising input costs, UMW Toyota (UMWT) made price adjustments to some of its product offerings. Models that are affected are the Toyota Vios (+3%-4%), Yaris (+3%-4%), Innova (+6%-7%) and Corolla Altis (+1%-2%). The new prices quoted now are also inclusive of sales tax because any new bookings moving forward likely will only be delivered after the end of the tax exemption period given that the company’s orders now have backlogged until the end of June. Notably, BMW Group Malaysia also has increased the price of its 530e and 530i by 1% each. With the precedent set, this could set in motion a spiral of price hikes for other auto firms, especially if the trend of higher input costs persists. Nevertheless, given that robust demand and backlogged orders stand at a healthy level of 2–4 months, we believe the impact of the price increase on future sales volume is likely to be marginal.

• Strong foreign currency movement may exert further margin pressure. The recent weakening of the MYR against the US dollar does not bode well for UMW Holdings (BUY, fair value RM4.00/share) and Tan Chong Motor (UNDERWEIGHT, FV RM0.65) as it will raise their landed costs in MYR terms. While the YTD 2022 USD/MYR average of 4.20 is still within our in-house assumption base case, further deterioration of the MYR may pose downside risks to our earnings forecast (Exhibit 6).

• Top BUYs. We maintain UMW Holdings as one of our top picks as all three UMW’s business divisions – automotive, industrial and manufacturing/engineering – are set to benefit from the reopening of the economy. We also like MBM Resources (MBM) (FV RM4.55) due to its attractive valuation, trading at 6x 2022 PE vs. its historical pre-pandemic (2015– 2019) average of 9x despite the improved outlook.

Source: AmInvest Research - 28 Apr 2022